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DTCC claims FTDs trivial. Bobo says, why, sure they are...

Location: Blogs Bob O'Brien's Sanity Check Blog


Posted by: bobo
6/28/2006 10:13 AM

The DTCC is now saying that the FTD problem isn't nearly as big as we all thought it was up until this late morning. You can read a copy of their release here.

http://finance.messages.yahoo.com/bbs?action=m&board=8729314&tid=nfi&sid=8729314&mid...

So it isn't $6 billion per day, it's $3 billion or so.

Huh.

Of course, that doesn't include the ex-clearing fails, which are routinely moved out of the DTCC's grasp, and thus their count. I've been told that number is 10 times as large as the "in-system" fails.

But here's the irony. You have the DTCC scrambling to assure investors that the FTD issues is small, and simultaneously, you have the SEC saying that it is large enough to justify grandfathering all past fails prior to 2005, so as not to destabilize the markets with volatility.

So which is it? A trivial problem, or one so large it could destabilize the markets?

Of course, neither firm will actually tell us how large that problem is in dollars or shares - far better to keep it secret. So we have to use our best guesses...

We can then turn to the FOIA data we have, and watch OSTK climb from no fails, up to 12.5+% of all outstanding shares failed, all in a matter of months, and all since being on the SHO list. We can view NFI's massive FTDs, and look at days where they accounted for 40%+ of the total trading volume for the stock.

Now, how much of that is likely due to the dog eating your certificates?

Let's assume that THIS TIME the DTCC isn't misstating the facts, as they did with Cam Funkhauser's comments, or the tall tale about not being invited to the NASAA conference. Let's assume they are telling the truth.

If that rolling $3 billion or so represents the current mark to market value of the fails, what would the actual value be if they were bought in?

Sky's the limit.

I wonder if issues like Delta are simply purged from the list when they go BK or are de-listed. That would be a convenient way to keep the number small.

And there is the ex-clearing issue, wherein the DTCC claims to be powerless, because of their own rules they passed, to police the settlement of ex-clearing trades, uh, well, you know, just because. I mean, who could expect the SRO chartered with policing its members/owners to actually do so, or that is chartered with upholding securities laws requiring prompt settlement to actually be able to do so? That's just too much to dream for!

No, I think moving the FTDs into ex-clearing, proclaiming that it is on the honor system, and then refusing to divulge how large that is speaks to a much better system.

I'm quite sure that the brokers who own the DTCC agree.

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In other news, Gradient is claiming that the testimony from Demetrios delivered to the Senate today is somehow tainted.

Read all about it here.

http://users1.wsj.com/lmda/do/checkLogin?mg=wsj-users1&url=http%3A%2F%2Fonline.wsj.com%2Farticle... 128.html

Why tainted? Because apparently it had been handled by someone at OSTK.

Wow. That is coming from the same lady who claimed that journalists didn't have access to the Gradient reports real time, and then had to change her, ahem, story, when it Herb Greenberg's real-time access was exposed. So assign as much weight as you like to that perspective.

Want my guess? One of the attorneys who has acted as a contact and adviser to him was asked to look over the testimony to ensure that it wouldn't get him sued - a liability examination. That attorney now works at OSTK.

Mystery solved.

But no, Gradient claims that it is all a construct of an elaborate conspiracy by OSTK, and Biovail, and....well....you know, all the rest of those persecuting these proud freedom fighters.

That's an awful lot of conspiracy theory chatter from the camp that regularly mocks me as a conspiracy theorist, wouldn't ya say?

Most things have simple explanations. Who are you going to believe - established professional misstating raconteur spokeswoman for Gradient, or the Easter Bunny?

This one is an easy call. Although it is funny to me how desperate everyone is to denigrate the testimony in whatever way possible.

Aguirre? CNBC says it isn't believable because he didn't present any evidence - other than the 46 page evidence he presented to the Senate Banking Committee, that is. Oh, and he did mention that the SEC threatened him with criminal and civil charges if he did present any.

Noticing a pattern here?

Copyright ©2006 Bob O'Brien